November 08, 2011 at 10:23 AM EST
Beyond UNG: Three Intruiging ETFs To Play Natural Gas
Natural gas is one of the more volatile commodities which allows for investors to bring home serious gains, but also serious losses. It has become a trading favorite thanks to its violent price swings and its paradoxical habit of being … Continue reading →

Natural gas is one of the more volatile commodities which allows for investors to bring home serious gains, but also serious losses. It has become a trading favorite thanks to its violent price swings and its paradoxical habit of being consistently inconsistent. With weekly supply reports from the EIA as well as constant investor speculation over future energy uses, it is no surprise to see this asset class surge in such high popularity. But with natural gas futures being a bit too complex and dangerous for the average investor, many have turned to the United States Natural Gas Fund LP (UNG) for their exposure to this coveted trading asset [see also Commodity Trading Trends: Crude Oil In Focus].

UNG is one of the most popular exchange traded products in the world; the fund holds over $1.3 billion in assets and an average daily volume topping 9 million. Unfortunately, this product comes with a significant amount of setbacks that have brought it under heavy fire in recent months. For starters, UNG passes along the nasty contango that natural gas contracts typically exhibit. As a refresher, contango is the process whereby near month futures are cheaper than those expiring further into the future, creating an upward sloping curve for future prices over time. When futures are contangoed, UNG’s monthly roll process forces it to sell low and buy high, erasing value for investors [see also Crude Oil Guide: Brent Vs. WTI, What’s The Difference?].

Also worth noting, UNG is an ETF, meaning it can exhibit tracking error as well as sending investors a K-1 form come tax time; something that many wish to avoid. Tracking error is the delta between the performance of an ETF and the change in the underlying index, meaning that UNG will not always trade in line with the futures it tracks. On top of all of that, UNG is prone to some horrendous performances, making it a rather risky product. But given all of its shortcomings, this product still remains in the spotlight. For investors who are fed up with UNG or those who simply want a potentially better way to play natural gas, we outline three alternatives below:

E-TRACS Natural Gas Futures Contango ETN (GASZ)

This ETN, which will not incur tracking error or distribute a K-1, puts a unique spin on natural gas investing. In an attempt to battle contango, GASZ shorts the near month natural gas contracts while establishing a long position in mid-term futures. This strategy helps to profit off of the roll process that typically loses value for an ETF and makes for a product that can actually be held in a longer term compared other futures-based funds that would be detrimental to a portfolio if held for extended periods of time. Note that the unique exposure comes at a price of 85 basis points compared to the 60 that UNG charges [see also Three Things Wall Street Journal Didn’t Tell You About Commodities].

Natural Gas ETFs
TickerFees1-Month Returns
3-Month Returns
UNG0.60%-2.93%-15.81%
GASZ0.85%0.66%3.62%
GAZ0.75%-7.60%-24.55%
NAGS1.50%-5.56%-14.05%
DJ-UBS Natural Gas Subindex Total Return ETN (GAZ)

This iPath ETN established exposure to natural gas futures, but rather than employing the ETF structure, GASZ is an ETN. This means that the fund will not deal with tracking error, nor will it distribute a K-1, though it will be at the mercy of the credit risk of its issuer. The fund does not feature the liquidity of UNG, but its appeal comes with its build-out, attracting investors who prefer to avoid ETFs when it comes to their futures exposure. The fund charges 75 basis points and has lost a shattering 32% on the year [see also ProShares Debuts Leveraged Natural Gas ETFs].

Natural Gas Fund (NAGS)

This young fund from Teucrium stands out from its competition. For starters, investors will notice that it charges 150 basis points, extremely high by ETF standards. But a closer look at this ETF and its underlying performance may draw some in, as the product’s strategy gives it the potential to outpace its competition. NAGS differentiates itself by aiming to reflect the daily changes in percentage terms of a weighted average of the following: the nearest to spot month March, April, October, and November Henry Hub Natural Gas Futures Contracts traded on the NYMEX, weighted 25% equally in each contract month. That structure is utilized in an effort to reduce the effects of contango and backwardation on fund returns [see also 50 Ways To Invest In Gold].

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Disclosure: No positions at time of writing.

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